Cepu Deal: Mediocre mentality

People hate a loss more than they value an equal gain. This is a quotation from Richard Layard’s best selling book Happiness, Lessons from A New Science (2004).

Cepu, Central Java and Bojonegoro, East Java are peaceful neighbors. But it could be ruined by the current clash on oil and gas resources overlapping both areas.

It’s all about money and politics. With potential output of 200,000 barrels per day, we are talking about US$10 million per day business or US$3.5 billion per year and US$100 billion for 30 years of contract.

The fields have proven reserves of 600 million barrels of oil (some say 1 billion barrels) and 8 trillion cubic feet of natural gas. With such enormous reserves, Cepu and its surroundings could be Indonesia’s Texas.

Central government confirmed yesterday through energy minister Purnomo Yusgiantoro that local administration will get 10% participating interest in the block. Yet it’s not clear which one, Cepu or Bojonegoro. The working interest is located in Bojonegoro, but the oil and gad deposits actually underneath Cepu.

Even though both regencies are offered to get equal share of, say, 5%, no guarantee either sides could agree. Both autonomy and oil and gas laws failed to address such grueling issues. Imagine that drilling wells are located in Bojonegoro while oil beds are in Cepu. Which regency is fall into category as producing area that deserved to get participating interest as dictated by 2001 Oil and Gas Law?

Should they share the fortune?

How Partai Kebangkitan Bangsa (PKB) with strong influence in East Java and Partai Demokrasi Indonesia Perjuangan (PDI-P) with overwhelming power in Central Java will tackle this issue?

Political switch

Indonesia’s position regarding Cepu has been switched along political changes. Baihaki Hakim, a former president of PT Caltex Pacific Indonesia (wholly-owned subsidiary of Chevron Texaco), rejected the idea of contract extension to Exxon Mobil when he was the president of Pertamina. Baihaki was appointed by then President Abdurrahman Wahid, founder and key figure of PKB.

His successor, Arifi Nawawi (appointed by president Megawati Soekarnoputri, chairwoman of PDI-P), meanwhile resume talks with Exxon. The results were that Pertamina and Exxon as contractor will get 40% of output, while 60% for government. With participating interest 50% respectively, both companies will get 20% output. Such deal sparked criticism as other contractors only get 15% output while government 85%. This is the standard contract.

What a shame for Megawati. His closest ally and key economic minister, Kwik Kian Gie, was a staunch critic for Cepu settlement and rejected such arrangement. Kwik maintain his stance until now and demanding Exxon completely out of the project.

It was Widya Purnama (appointed during Megawati presidency’s last days), the current president of Pertamina, who also publicly opposed the idea of resume talks with Exxon. His first statement after appointment as Pertamina CEO was, “I will leave this post if government give Cepu block to Exxon,” Widya said in August 2004. He said Pertamina more than able to operate the block without Exxon Mobil. Pertamina even planned bond issuance up to US$2 billion to finance the project. But that’s already history.

Widya is counting his days. He is a lame duck CEO. President Susilo Bambang Yudhoyono had stepped in Cepu affair right after his inauguration in October 2004, especially after his first meeting with US President George Bush in Santiago, Chile November 2004. Both reiterated Cepu resolution in their second meeting in Washington DC last month.

SBY then asked Chief Economic Minister Aburizal Bakrie to establish a negotiation team. The team is led by Martiono Hadianto (Pertamina chairman and former CEO during BJ Habibie presidency), with members Lin Che Wei (expert staff of SOE ministry), Rizal Malarangeng (former political analyst), Muhammad Abduh (Pertamina commissioner), Umar Said (former secretary general of energy department under Ginandjar Kartasasmita), Mustiko Saleh (vice president of Pertamina), and Muhammad Ikhsan (economist, expert staff for Aburizal Bakrie’s office).

Some political parties, namely PDI-P, PKB, and recently Partai Amanat Nasional (PAN, once led by reformist Amien Rais, strongly rejected the negotiation team. But government moves on.

The result, this is preliminary and subject to President SBY’s approval, is 70% output for government and 30% for contractors. The contractors are Exxon Mobil with 45% participating interest, Pertamina also 45%, and the remaining 10% for local administration.

It is a better deal if we compare to 60%:40% arrangement under Nawawi, but it is worse than standard contract of 85%:15% between government and other oil contractors.

Well, government argues such deal is a win-win solution. Indonesia could resume its position as OPEC member and reduce fuel subsidy, while Exxon will surely make money out of it. But it shows, once again, how weak we are in dealing with high-level intervention as Bush and SBY did and mediocre mentality.

Who could gain the most?

Exxon: Will get 45% of participating interest of the block. Let say the block will produce 200,000 barrel oil per day, Exxon will get 45% by 30% (as 70% of output is government’s share) which is equal to 13.5% or 27,000 bpd. At US$50 per barrel, Exxon could generate US$1.35 million per day or around US$492 million per year. The contract expires in 30 years meaning Exxon could make US$15 billion for the contract period. Sure, Exxon is promising investment up to US$2 billion to develop the block. But anybody would dare to invest such amount to get big chunks of US$15 billion, right?

Pertamina: Without any significant efforts, Pertamina will make the same amount with Exxon over 30 years period. The company is lucky to inherit the state’s rights over oil and gas resources, even though new oil and gas law deliberated in 2001 had lifted that.

Suppliers: Companies like Seamless Pipe (subsidiary of Bakrie & Brothers) has opportunity to supply huge amount of pipes to support Cepu operation.

Partners for local government: Like in many cases, most likely that local administration (both in Cepu and Bojonegoro) is preparing to establish a joint venture company as a vehicle in the block’s participating interest.

Losers

Indonesian, the rest of us, lost the opportunity to get better deal which is 85%:15%. This is a huge difference, which is 15% of 200,000 bpd (equals to 30,000 bpd) and at US$50 per barrel Indonesian government lost US$1.5 million per day or US$500 million per year and US$15 billion in 30 years.

Extra happiness provided by extra income is greatest when we are poor and declines steadily as we get richer. In reverse, any lost of income (opportunity) for the poor (Indonesian) brings a lot more misery than the rich (Exxon and USA).

READ MORE!!!